If you’re considering investing for a child’s future or are already doing so, why not make sure you’re doing it as efficiently as possible? Like all investments the earlier you start, the easier it is to reach your goals. And investing for a child can be quite complicated so making the right choices can make a big difference. Here are some tips to help you (and them) get ahead of the game in the New Year:
Plan ahead
Save, save, save. Its sounds elementary but a survey by Newspoll for the Commonwealth Bank showed 14 per cent of parents were taking out a loan or drawing down on their mortgage to meet the cost of paying for children’s education. While most of the 40 per cent of parents and grandparents who saved in advance, admitted their savings fell short. The interest you pay on borrowing money could almost double the amount you pay. So get in early and the effect of compounding will make it easier to create wealth.
Universities offer a discount for paying fees upfront instead of using HECS. And some private schools even allow you to pay school fees up to ten years in advance. This means you get today’s prices without paying tax on investment earnings.
You’ve got time on your hands
If you’re investing for a child to help out with education or a home deposit, you’ve probably got a good ten years up your sleeve. So consider growth investments like shares and managed funds to ensure the value of your savings continues to outstrip inflation. Historically these investments have performed better than other savings vehicles over the long-term.
Don’t let the tax man get your child’s house deposit
Many investments cannot legally be held in a child’s name and many parents and grandparents prefer to put money in trust to ensure it’s used the way they intended.
But the tax situation for investing on behalf of a child is tricky. Whether income is taxed as the adult’s or child’s will depend on the investment’s source and how income is used. Before you proceed, you should seek specialist tax advice. Here are some things to consider:
- A child under 18 is taxed on investment and other ‘unearned’ income of more than $416. Income above that amount is taxed at a rate of up to 45% (and possibly Medicare). However, if they are eligible for the low income tax offset of $600, in effect, the tax free limit is $1,333.
- If a spouse has a low income they may not be using their tax-free threshold. By having this spouse as the owner and declaring income, there may be no tax liability. If they are already using their tax-free threshold, they may also be able to use the franking credits to offset income tax payable.
- To minimise the impact of a tax liability, invest for growth rather than income. If a tax-paid investment is used no income distributions are made.
- transferring an investment to a child once they reach 18 may incur capital gains tax.
Don’t do yourself out of a pension
Money you have invested for a child, irrespective of who is paying tax on it, is generally considered your income for Centrelink purposes. If you are on the age pension for example, make sure investing for a grandchild is not going to jeopardise your entitlement. If it is, you could consider gifting money to them up to $10,000 per financial year (with a $30,000 limit in any rolling 5-year period). Gifting money up to this amount will not result in any loss to your pension.
Investing for a child is complex. We can help you determine whether these strategies are suitable for you or can suggest other strategies which could be of more benefit.